Islamic Jihad on Sunday said it would observe an Egyptian-brokered truce in and around Gaza after a day of violence which killed nine Palestinian militants and an Israeli.
The ceasefire, which came into effect shortly after dawn on Sunday, appeared to be holding, with Israeli police and the military saying the rocket fire had tailed off shortly before 7:00 am (0500 GMT).
The flareup, which began on Saturday afternoon when an Israeli air strike in southern Gaza killed five Islamic Jihad militants, was the most deadly confrontation in and around the Gaza Strip in more than two months.
Overnight, sources close to Gaza's ruling Hamas movement and the Islamic Jihad, which was at the forefront of the fighting, said Egyptian intelligence officials had managed to broker a ceasefire effective from 6:00 am (0400 GMT).
"The efforts and intensive contacts led by senior Egyptian intelligence officials led to a national consensus to restore calm," one of the sources told AFP, speaking on condition of anonymity.
Several hours later, a senior Islamic Jihad official said its militants were observing the agreement, although the group said it would retaliate if Israel conducted further strikes.
"Islamic Jihad is committed to the truce as long as the occupation commits to it," the official told AFP, speaking on condition of anonymity.
"This decision comes after Egyptian efforts to convince the resistance factions, especially Islamic Jihad leaders in Damascus," he added.
As the two sides waited to see whether the calm would hold, Israeli schools within a 40-kilometre (24-mile) radius of the Gaza Strip were closed for the day, and police maintained a level of alert just one below the highest.
The bloodshed began on Saturday afternoon when five Islamic Jihad militants were killed in an Israeli air strike on the southern Gaza town of Rafah.
In the ensuing violence, another four Jihad activists were killed and five injured in several air raids, while in Israel, one man in his 50s died from shrapnel wounds after a rocket hit the southern port city of Ashkelon.
Benny Gantz, Israel's chief of staff, met with top officers in the military's southern command and told them the Egyptians were making huge efforts to calm the situation, an Israeli military source told AFP, indicating the truce had taken hold slightly after the 6:00 am deadline.
Israeli police said 31 rockets had been fired into Israel since Saturday's initial air strike, with 12 fired between midnight and 6:40 am. None of them caused casualties.
The first Israeli attack on Saturday killed five members of the Jihad's armed wing, the Al-Quds Brigades, and left three other militants in critical condition, medical sources said, with the army saying it was a preventative strike against "terrorists preparing to fire long-range rockets" into Israel.
Several hours later, rockets began falling on southern Israel, prompting further air strikes which killed four more militants and wounded another two, witnesses and Palestinian officials said.
In Israel, rocket fire hit the southern cities of Ashdod, Ashkelon and Gan Yavne, killing one and injuring another four, two of whom were in serious condition, medical officials and police said.
Israeli Prime Minister Benjamin Netanyahu contacted the mayors of Ashkelon, Ashdod and Beersheva, and vowed that the military's "tough response will be even tougher if necessary," a statement from his office said.
Saturday's flareup was the worst since August, when clashes in and around the Gaza Strip killed 27 Palestinians and an Israeli.
The confrontations erupted when gunmen killed eight Israelis in the southern Negev desert on August 18 in an attack blamed on Gaza militants which sparked a week of bloody air strikes and rocket fire.
The fighting ended with a truce agreement which went into effect on August 26 and which has largely held.